A bank offers an account with an APR of 5% and an EAR of 5.12%. How does the bank compound interest for this account?
A)annual compounding
B)monthly compounding
C)weekly compounding
D)semi-annual compounding

Question

Quizplus · Accepted Answer

The fact that the EAR is greater than the APR suggests that the interest is being compounded more frequently than once a year. The monthly compounding would lead to an EAR of approximately 5.12%, making it the best choice. The weekly compounding would lead to an even higher EAR, and semi-annual compounding or annual compounding would result in a lower EAR.

A Bank Offers an Account with an APR of 5